Today we'll look at Ban Leong Technologies Limited (SGX:B26) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Ban Leong Technologies:
0.10 = S$3.5m ÷ (S$62m - S$27m) (Based on the trailing twelve months to September 2019.)
So, Ban Leong Technologies has an ROCE of 10.0%.
Does Ban Leong Technologies Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Ban Leong Technologies's ROCE is around the 9.9% average reported by the Electronic industry. Separate from Ban Leong Technologies's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Ban Leong Technologies's current ROCE of 10.0% is lower than 3 years ago, when the company reported a 15% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Ban Leong Technologies's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If Ban Leong Technologies is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Ban Leong Technologies's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Ban Leong Technologies has total assets of S$62m and current liabilities of S$27m. As a result, its current liabilities are equal to approximately 44% of its total assets. Ban Leong Technologies has a medium level of current liabilities, which would boost the ROCE.
Our Take On Ban Leong Technologies's ROCE
Ban Leong Technologies's ROCE does look good, but the level of current liabilities also contribute to that. Ban Leong Technologies looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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